If I’m not wrong, this was discussed here in Dec-2016.
You can find the original post here: https://twitter.com/leading_nowhere/status/908585649501900800
Thank you for the credit @parkhi_nazar
You should know that investors gave them an earful about guarantee commission on the last earnings call. Management has promised to look into it. Will be interesting to track how this moves. In any case, if you are considering an investment in Mirza, you should be aware that it is not a paragon of corporate governance. The bottom line is that those who are invested know this, but have taken the view that the company’s growth will provide enough for minority shareholders even after the promoters have chomped off a few bites. Corporate governance is a monitorable, but there are other monitorables that are far more critical for Mirza at this juncture
Discl: Invested from low levels
After having mulled the results, here are my thoughts.
Sales up a paltry 4% and profits down about 10%, OPM down to 16% from 18% makes it look bad optically but this needs to be broken down. My thesis for investing in Mirza is the focus on domestic business where the opportunity size is relatively large and the cheap valuation (which happens to be due to lack of growth and corp governance issues).
The domestic business revenues have grown at a whopping 40% YoY and 12% QoQ. This is a very good sign and shows that the new stores are contributing to the growth. However, profits for domestic business have grown only 11% YoY and 12% QoQ. Maybe the discounting is hurting the margins - Is it the discounting only or is it the upfront costs that have to be borne to open new stores? Or is it the ad spends in building the brand? In other words, is there scope for margin expansion is something we need to watch for.
Another reason for PAT being lower is the finance costs. So topline growing is the single biggest sign here that is very encouraging. Exports are also up QoQ which is also slightly encouraging. This is in line with exports figures for “Footwear of leather” to UK.
Markets do like to signs of improvement on a quarter on quarter basis but in this case I think we have to be patient to see if the investments being done to the brand (ad spends), stores presence, product quality etc which are all intangibles in the scheme of things contribute going forward. There is going to be a delay before these things show up a numbers (if at all) so for now I think we need to hear the management out and see what they are doing.
This reminds me of something I read in Peter Senge’s ‘The Fifth Discipline’.
In essence this system diagram represents the feedback loops representing a business for a company that was in the business of selling computers. The first loop on the left is a reinforcing loop - As in, as the size of sales force increases, orders increase and with it the revenues which means the sales force can be increased further thereby contributing to more orders - This is like a snowball effect - positive feedback loop in scientific terminology. Now as orders increase, delivery time increases if the capacity is not ramped which causes delays in delivery time - which means Customers are disgruntled but the company thinks that the customers are lining up for the products, so its OK to keep them waiting (short-term thinking).
As delivery time increases though, disgruntled customers don’t come back the next time and orders drop off after a delay. The company may think that their current capacity is enough to serve their orders and doesn’t invest in capacity or in maintaining inventory which leads to a balancing loop - orders don’t grow further than what the company can service. There are delays in this system which makes short-term effects lead to short-term thinking while the solution involves long-term thinking of improving capacity to cut down delivery times leading to happier customers who come back or spread the word - This deals with the balancing feedback loop and fixes the problem whose effects will show up only in the long-term.
I think something of this sort happens with every retail business that is out to build a brand - its a catch 22 situation - without stores, a brand, inventory, working capital intensiveness - the business will never take off and the investments will show their outcome with a delay and there is no way of knowing that outcome. I believe things could change in the medium term but we need to follow this carefully.
P.S Apologies for the long-winded systems thinking perspective. I wanted to add a systems diagram for Mirza but couldn’t due to lack of time.
Q1 FY19 Concall Notes
- Branded India sales is 117 cr in Q1. In this 87 cr is footwear and 30 cr. is garment. Of this 87 cr 70% is Red Tape and 30% Bond Street and Athleisure.
- 17-18% EBITDA in branded side.
- Advertisement expenditure was Rs. 2.54 for the quarter.
- Borrowing at Rs. 300 cr as on June 2018. Out of this Rs. 40 cr is term loan and rest is working capital. Debt equity at 0.54 times as on June 2018.
- 15 retail stores opened during Q1FY19. Total stores are now 174 out of which 23 stores are on online model.
- Next 25-30 stores coming up in 2 months. Will be opening 9-8 stores in next 10 days.
- This is the last quarter in which we saw decline in exports. From here on we are targeting 5% growth yoy in exports.
- Capacity utilisation in exports is at 78% right now.
- On corporate governance issue Mr. Shuja said that he was not in the company when the current corporate guarantee structure was implemented. They are talking internally and will resolve this issue in the coming time.
- Tannery Capacity in Q1 operated at 55% capacity. It will achieve 65% utilisation for FY19.
- By FY 2020 want to domestic sales of 900-1000 cr and Exports sales of around 700 cr.
- After 2020 will try to spread the Red Tape brand in exports market like Thailand, Middle East and later in Europe. In long term want to see Red Tape at level of Nike, Adidas.
- All over the world the model has changed to Discount Model. For e.g. Nike may have one big store in San Francisco but it has 9-10 discount stores on connecting highways. Can’t change the model, we can only change ourself to adapt to it.
- Reduction to 5% GST has no impact on us. All our goods are priced at above Rs. 1000. Discount shoes are sold at less than 1000 but the MRP on products is above Rs. 1000, so no impact on us.
- 50-60 lac working capital requirement for each shop.
- After the import duty increase on China, we have started sourcing from other countries. Design development and quality control is in our own hands.
- 30:70 is Non Leather and Leather ratio right now.
- Working Capital
- Inventory is high as we are in expansion phase. Inventory already purchased for stores coming up in next 2 month.
- 120 days of inventory is what we will like to achieve.
- Early March and early September is when we buy new inventory so it is high during those times.
- Working Capital will come down in next 2-3 quarters.
- Have no inventory which is more than 9-12 months old.
- 10-15% of inventory is in 6-9 month old time period.
- In FY19 Working Capital days will be reduced to 150 days.
- Working Capital loan average cost is at 8%.
- Online Stores
- Online model stores have different cost structure. Per sq ft cost of these shops is low. They are opened in cheap real estate markets. Margin profile is similar to Offline.
- Online shop stock does not go to Offline Shop.
- Have different inventories for Fresh Shop and Discount Shops.
Any update regarding significant fall in profit from Leather segment-Rs. 40 lac against last year Rs. 300.75 lac even when leather segment sales has increased.
The Leather Segment mentioned in the results pertains to the tannery division which is operating at low capacity utilization (55%) and is hence at break-even level. Going forward the company expects utilization to inch up to 60-65%.
To continue with the systems thinking perspective I had started in the previous post, this is how the causal loops look for Mirza.
There are several loops here - both reinforcing as well as balancing and this is what makes it a dynamic complexity problem. This is by no means an exhaustive model but just the entities that should carry a bulk of the freight.
Sales is positively influenced by discounts, brand equity and choices for the customer and also by having more stores/salespersons.
Discounts is low-hanging fruit that can influence sales in the short-term but in the long-term can have detrimental consequences. Discounts negatively impact brand equity and profits. Psychologically as well, returning customers expect more discounts than the last time.
Brand equity is the magic-potion for sustaining sales in the long-term. It needs more ad spend which positively influences brand equity.
Choices and product quality are paramount for the customer to be interested in the product and this means maintaining an exhaustive SKU and inventory - Something that short-term investors will frown at - as it impacts the WC debt and until the optimum inventory turns and consequently the capital turns are achieved, this is walking on thin ice.
Maintaining optimum inventory means reinvesting the profits in WC and also probably taking in more WC debt but interest on debt will impact profits and can cripple future expansion or even sustenance if the churn of the causal loops isn’t respected.
Reinvestments is not just in WC but also in stores (I have missed drawing the link). In the case of Mirza, investment in a store is primarily investment in the inventory for the store.
Profits is obviously positively influenced by sales but negatively influenced by discounts, expenses per store, ad spend and interest.
A company that masters these causal loops should think both in terms of the short (discounts) and the long-term (brand equity) at varied proportions as it matures. Probably starting with more discounts and then reinvesting the profits in growth - until market saturation (optimal number of stores) is reached and then focusing solely on the brand equity for sales sustenance and same store sales growth.
I presume Mirza has set out on this path and I am curious to see how things turn out more than anything else.
The story looks very enticing - local leather based footwear company trying to become pan national sports/athletic wear company and then having ambition to become global player (heard Mr. Shuja Mirza saying it on con call today). Few concerns as highlighted by many boarders-
- Extremely aggressive store expansions (investment, working capital, expenses)
- Heavy discounting used to attract customers (brand image, profitability)
- Corporate governance issues like promoter guarantees, related party transactions, high director salaries etc.
First 2 can be considered part of strategy and can go either way based on how they execute. Third one is absolutely abhorred by the market. Responding to investor emails, regular conference calls and uploading transcripts are the steps in showing their investor friendliness. But unless Mirza’s let go their old ways of compensating themselves by various methods, it would be struggle for the stock price to move up as all the growth and its benefits may never reach the shareholders!
Disclosure - tracking position initiated.
Mirza International Ltd
Highlights of Q1 FY19 results
- Indian Branded business has achieved 27 % growth in the quarter. Footwear branded sales has grown by 21 % to 287 Cr and branded garment sales has gone uo by 49 % to 30 Cr
- Export sale during the year was down by 8 % .
- Company have open 15 retail stores in this quarter out of which 14 are larger format stores , Total number of stores reach to 174 out which 23 stores are Online stores.
- Launch new brand name “MOTE” which is selling ladies slippers and sandals and company has diversified its portfolio to synthetic shoes , sport shoes Pin shoes and Canvas shoes and some other accessories.
- Revenue grew by 3.47 % to 262.19 Cr compare to last year same quarter
- EBITDA for the quarter 43.24 Cr as compare to 43.78 Cr last year same quarter
- EBITDA margin for the quarter is 16.51 % compare to last year same quarter
- PAT stood at 18.07 Cr compare to 20.41 Cr in last year same quarter
- Export of footwear decline by 8 % to 122 Cr against 133 Cr in the last year same quarter
- UK market is decreased by 18 % and turnover is 72Cr compare to 88 Cr last year same quarter
- US market is increased by 18 % and turnover crossed to 33 Cr compare to 28 Cr last year same quarter.
- In the branded sale of Red Tape and Oaktrak brand is 117 Cr and out of it 87 Cr is branded footwear sale and 30 Cr is branded garment sale. There is a growth of 27 % in this segment on YOY basis
- Advertisement expense for the quarter is 2.54 Cr and it is 2.15 % of Indian branded sale
- Net financing cost is 7.35 Cr against 5.72 Cr because total borrowngs has been increased to 300 Cr as on 30th June 2018.
- Debt-Equity ratio is 0.54%
- Net worth of the company stood at 591 Cr
- What strategy company use for hedging ?
o Whenever company receive the order company book that much currency at that time supposed to be delivered . So company Hedge during booking and don’t hedge extra amount. All exports are 100 % covered by the forward contract.
- What was the margins on the leather sales and future outlook on it ?
o In the tannery the capacity utilization is on the lower side so company is on the break even and don’t get any margin because leather utilization is not so high. Going forward as the Red-Tape sales is growing so it will move the capital utilization upward and convert the cannery to profitable.
- Kindly give break up on branded sale ?
o Total branded turnover is 117 Cr out of these 30 Cr is branded garment and 87 Cr is the branded footwear and out of 87 Cr 30 % is represent by two new brands which is bond street and the athlete and rest is the red tape.
- Kindly give details on working capital ?
o It is little higher because of expansion on domestic side where company is increasing online shops which right now is 23 and plan to increase by next 25 stores in 3 – 4 month and that require CAPEX of 50-60 lakh for each shop in the infrastructure and additional inventory so that’s why company have to increase its working capital current total loan is 300 Cr out of these term loan is around 40 Cr and rest is working capital.
- What mark up is company generating on garment side ?
o In all branded side company is getting EBITDA of about 17-18 %
- How does expansion of online stores will affect on the gross margins front because of discounting on online store?
o Discounting don’t have any effect on gross margins because that is a different cost structure .Online stores are not open in high expensive area they are open on a lower quality area where the brands are lower and everything is adjusted in a way that company get similar margins. Margin profile have to be do with the how success is the one online store which is making more margin from an offline store and also there are some offline store that is not making money than company have to reduce the prices to clear the Inventory.
- Does the inventory set up can be settle between offline and online stores ?
o No whatever company sale in offline store that does not go into online store . Actually lot of them are connected live with online portals like Paytm and others. So for example if one order a shoe online from Amritsar then the shoe will go from Amritsar shop to the order address.
o Discount also depend on the product performance if it not perform well in offline and online both then company decide how to liquidate it fast.
- Will the higher working capital and higher inventory days will affect the balance sheet ?
o No it will not , because all 25 store company is going to open in next 2 month and investment for it is already done so now the time is to generate cash from it so in the next 2-3 month the inventory days will be start reducing.
- What is the inventory days target from current 180-200 days ?
o 120-140 days
- Why inventory days are so high currently ?
o Because company is at expansion stage normally it take about 3-4 months to get the garments and footwear into the stores and company is targeting 30-40 shops in large format in August but there was certain disturbance like raining in north east , Kerala so lot of shops got delayed so that’s the reason why inventory days are higher.
o Company is not a hardcore retailer because lot of revenue comes from distribution and shop-in-shop model so there the numbers are drastically different from being a complete retailer.
- Who designs and maintain the consistency of product designing ?
o Designing , quality and sourcing of material is all done from company itself.
- Does company carrying a full year inventory because company inventory has gone up by 100 Cr but sales has not gone up relative to it ?
o Current scenario is company is going through a off season batch and now the season is starting in last year company had done a turnover of 390 Cr and this year company is target to 600 to 650 Cr which is substantial quite big from last year so for to achieve that kind of number company need to have right product in . In Indian market the season opens after 15th August so one has to buy the right product to get the right sales. Its better to have high inventory at the beginning of the season rather than less inventory in the season which result in loose out the opportunity in the stores. Company is in phase of expansion so it will get settle down going forward by inventory management team and company is targeting 50-60 % growth.
o Company also cannot orders per month in India . Company get two shots in early march and September so early march the inventory was flat and in that inventory company had plan to open 23 stores in June-July so because of that the inventory get little disruptive the entire problem will be shorted within one to two quarters.
- Is there any company which hold same model like company ?
o Yes there is and that is Alibaba and Mirza company stores are powered by paytm
- Does the smaller offline stores will get affected by large online discount stores ?
o Small stores are discount stores and in a higher market one will see a fresh Red-Tape store selling a different kind of product and company have discounted shops. So instead of having 500 sq ft discounted shops company has now decided to open it in 4000 sq ft shops. The size of discount market out of the area is very big so there is no conflict.
- What could be the challenges facing by the company going forward ?
o There are multiple challenges like
Government is changing its policies in duties overnight so entire planning get disturbed.
- Why growth in earning is not there on the export side ?
o This quarter would be the last quarter for decline for the current quarter company expect it to be better and company is targeting growth of 5 % in exports for full year.
o 74 % of total export is coming from UK and 15 % from US . UK is the most declining country because it is one of the biggest market. For the FY19 company is targeting a turnover of around 550 Cr and company is expecting growth of around 5-6 % on annual basis.
- What sort of EBITDA margin is targeted for the FY19 ?
o 17-18 %
- What is the company E-commerce growth in brand wise ?
o 49 % in the current quarter and turnover was 24 Cr in last year first quarter and now achieve 49 Cr. 30 % comes from Bond street and athletes and rest 70 % from the red tape brand.
- Did the EBITDA margin of 13-14 % is sustainable in exports and what is the export utilization ?
o Yes and 78 %
o Export utilization is 78 %
- What is the value of total inventory as of date ?
o 397 Cr and company don’t have any inventory more than 9 month.
o The percentage of inventory for range of 6-9 month is around 10-15 % and it keeps on changing as the model keeps on changing.
o Some of the inventory which got rejected with quality are sold at below cost to about 0.25 % to the people who pick up lots .
- What is the company plan of organizing building ?
o From last 2-3 years company was looking at the domestic business completely and company have team place in different regions and company is hiring lot of people across the country and company have different regional head , online head , offline stores head
- What are the current receivables ?
o 160 Cr as compare to last year it was 130 Cr
- What was the last quarter inventory ?
o 320 Cr
- What would be the percentage of manufacture to outsource goods ?
o 55 % manufacturing and 45 % to outsource goods in which garment is 100 % outsourced.
- What would be the percentage in leather compare to non-leather ?
o 30 % from athletes and Bond street which are non-leather and 70 % from leather.
- What would be the total revenue outlook for FY20 ?
o 900-1000 Cr for domestic business for red-tape business in India 700 Cr in exports so overall 1600-1700 Cr overall target by 2020
- How is the response from the market dot the new women brand under name MOTE and footwear for ladies ?
o Sports footwear is selling very well , MOTE get a very small window right now it is just in the market from about less than 3 months . Company is now planning other inventory . Company is expecting 30-40 % of contribution in branded sale
- Why do company need promoter guarantee for any kind of borrowing ?
o This is the condition from the bank side.
- How much working capital days company is targeting for FY19 ?
o Company is targeting to reduce it to 150 Days
- What is the tannery capacity utilization in Q1 FY19 ?
o 55 % and on full year it will improve to 65 %.
- What is the company average cost of working capital ?
o Average cost is somewhere around 8 %
- How will the ROCE for coming 2-3 years ?
o It will increase by 2-3 % in coming 2-3 years to 17-20 %
- How company track the profitability ?
o Company have ERP systems in every store to track profitability and company track it on every month.
- How Paytm is helping company to grow ?
o They are the channel partner and technology partner and they work closely with the company to design the entire systems
MIL reported revenue of Rs 2.6bn, a growth of 3.9% yoy led by 40% yoy growth in branded shoes revenue and 17.6% yoy decline in revenue from make to order exports. Red Tape brand exports recovered strongly on a low base of last year.
On domestic side, domestic brand sales grew by 27% yoy which was on the lower side as the company has guided for 50% yoy growth in domestic brand sale in FY19E.
EBITDA margin declined by 100 bps yoy to 16.5% and was below our estimates on account of lower margins in the branded shoes business on yoy. In the quarter, the company witnessed increase in working capital which took its debt to Rs 3.1 bn (Vs Rs 2.7 bn at the end of Q4FY18).
MIL management has maintained guidance for 50% growth in revenue from domestic brand business based on strong response expected for Red Tape sports, Bond Street and other new brands. The company expects improvement in exports business (0-5% growth Vs 10% growth guided earlier), as it sees some sign of improvement in the segment.
Last evening I visited a branch nearby ( or rather stumbled upon). Few interesting observations -
70% sale was on and the store was jam packed. Roughly 1000 Sq ft. in a good mall.
50% merchandise was apparels and most of the buyers were focused on those… Hardly any shoe buyer in half hour i spent
Quality to price equation seems good. I bought 2 shirts for 1100 INR - something that would cost me 5000 at Louise Phillipe
Good quality although packing and store front was poorly managed and high value customers won’t typically walk in
The store owner had franchise model with mirza and seems he had a good deal from them. As this store was earlier a Levi’s one… Now 50% branded for red tape.
Sales guy told me that business is good… Didn’t get numbers though.
The gentry of buyers seemed middle class, salaried type who would be drawn with a 70% discount tag.
In my assessment, what Mirza is trying is to give people a taste of their merchandise with hope that they would stick going forward given good quality at low prices. Key would therefore be to keep prices low while maintaining quality … Particularly in apparel, something that’s new to them.
Behind the Red Tape logo, the space was for Levi’s. The store owner said both brands are doing well although I felt he was evasive.
Thanks for sharing. Also try visiting their large format online stores…the apparels are available at a very good price and quality is good.
Need to see how these guys manage their inventory and if they can grow maintaining the current margins.